New Zealand Herald, 15 November 2011
Gareth Morgan, Director of Gareth Morgan Investments
Let's agree on what is a minimum income every adult should have in order to live a dignified life and then see what flows from that. One of the topics of debate during this election campaign has been whether the minimum wage should be $13 or $15 an hour.
That number is both arbitrary and irrelevant to the well-being of those paid the rate. One political reality of the minimum wage is that it is deemed inadequate for folk to live on. Hence it is topped up with all manner of special payments - the accommodation supplement, subsidies for childcare, special needs grants for those deemed in hardship and the sizeable top-ups available from Working for Families. Looking at the extent of the top-ups now paid, even $15 an hour would be inadequate in isolation.
Welcome to the reality of 21st century wages. Apparently people cannot live on the minimum wage so taxpayers have to transfer to them increasingly larger top-ups. You may well ask whether we have an exaggerated opinion of what should be a minimal level of income, but certainly the market cannot support a wage rate that covers all the top-ups, otherwise it already would be paying it. Even at $13 the supply of labour exceeds the demand.
If we raised the wage rate to make such top-ups unnecessary, jobs would go and taxpayers would have to fork out for those who could no longer find work. This is our dilemma - we have a minimum acceptable income in mind but it is higher than what the market can pay to support full employment. So we either legislate a minimum wage that needs no top-ups and put a whole lot more people out of work or we decree a somewhat lower minimum wage and pay top-ups to those working at that rate. Or, heaven forbid, we change our mind and say full employment is the most important goal so we're going to allow the market to set whatever wage it likes. Now that would be a revolution.
But for now just accept that the debate about a $13 or $15 minimum wage reduces to one about how much taxpayers should transfer to these folk versus how much of their requirements should be funded by employers through payment of a higher legislated minimum wage (with the consequence that we would have to accept greater numbers of unemployed requiring a full taxpayer provision). Surely not many would argue that we can set the minimum wage at whatever level we like without employment levels being affected. Believe me, such thinking does exist.
Let's turn the whole puzzle around. Rather than decreeing a minimum wage and discovering the consequences for jobs and top-up payments, let's agree on what is a minimum income every adult should have in order to live a dignified life and then see what flows from that.
We begin by specifying the income level below which we are not prepared to see anyone having to live. From there we must design a tax regime that doesn't penalise people who work part time or in low-paid work - that means an end to the steep abatement rates of our current regime of targeted welfare, a feature which traps people in benefit dependency. We must finally admit that with all the paternalistic will in the world there is no chance that public servants can adequately identify and monitor eligibility for a needs-based benefit regime. We should save ourselves the torture of continuously getting it wrong and designing an endless stream of discriminatory "fixes" to cover our mistakes in finding targeted perfection. The reality is that people's circumstances are dynamic and that they will change their behaviour to suit the design of the benefit regime making the chicken and egg nature of determining "needs" an exercise in futility. The important thing is to be fair and to have a consensus on the level of income that we all have an unconditional entitlement to in order to live a dignified life.
In the book The Big Kahuna it was suggested that an unconditional basic income at $11,000 after tax would be a level that could be maintained in a fiscally neutral scenario. If you think that's too stingy then be prepared to have a higher level of tax than 30 cents in every dollar earned. But at least if we decide on that as a human right we can then discuss what the role of the minimum wage might be. Let's do that.
Critics of the unconditional basic income suggest it will encourage legions of layabouts who will not work (either paid or unpaid) and just live an idle life, making no contribution to society whatsoever. The logic of this argument goes that many of those who live on $23,000-plus now from their minimum wage full-time jobs will give up work altogether if they get a wage of half that. Yeah right. Ironically if they did we'd reduce unemployment. If the basic payment eradicated unemployment by destroying enough people's will to earn then of course you'd expect labour shortages to drive up wage rates. I'm not holding my breath.
With the $11,000 basic income in place, the rationale for needing a legislated minimum wage at all needs to be revisited. While we would still want legislation about working conditions (sick and annual leave, safety, rights of redress and so on) with the burden of ensuring an adequate income for all resolved there is no need to rely on a legislated wage rate for paid work to deliver income adequacy. As it happens the arithmetic tells us that a wage rate of $8 an hour would, in a world of a flat income tax rate of 30 per cent and an $11,000 basic income, deliver the same post-tax income as the $15 an hour minimum wage proposed by Labour. There should be a lot more jobs if wage rates of $8 were kosher.
We do shoot ourselves in the foot trying to ensure income adequacy by dictating what wage rates in the market should be. What you win on the per hour payment you can easily lose on the lack of jobs. We needn't fear a lower wage economy under a basic income regime, the money is already guaranteed. And imagine if we became more competitive, what that might do to overall incomes and the ability to pay an even higher basic income? Oh it's all too much.
Rather than making paternalistic judgments on people's needs, the unconditional basic income frees us as a society to set one income for all and then allow the market to set wage rates consistent with full employment beyond that.
The Kahuna revolution is not all bad is it?